Financial Technology

Insider Fraud's Worst Enemy Should be Human Resources

Business is based on risk. The risk of investment that may not have a return, the risk of products that may not find a market and the risks of hiring the wrong people for the job are all parts of the picture. Insider fraud is one of the biggest risks many companies—especially financial organizations—can face. There are several defenses on hand to combat this problem, but one of the biggest potential protections may be one of the most unexpected: human resources.

Along the subject of derision with employees, human resources may be one of the best defenses against insider fraud there is. Banks have long focused on their information technology to provide protection against fraud—firewalls to prevent unauthorized access, password protection to protect payment systems, and similar measures—but what is to be done when the person performing the fraudulent, corrupt or otherwise unauthorized actions is authorized to be in the system?

Electronic protections can defend against outside access the same way a locked front door can protect against home invasions, but when someone has the house key, well, that's a different matter, and a matter for human resources to shine. Human resources' first task in protecting systems against insider fraud is to weed out potential troublemakers at the gate, with the development of initial forms and interviews, and then performing vetting procedures to ensure accuracy. But the interviews and initial forms themselves are also seen by many—even in human resources—as a selling tool. Is the company hiring a sales rep? Suddenly everyone from car salesmen to McDonald's cashiers are sales reps with sales experience. In a certain light, they even are. Should human resources call these tactics lies, making those presenting themselves this way more likely to steal? Or should human resources call them innovation and creativity, valued traits at many firms?

Some here believe that the key is to look at experience, and see if the assertions could be considered true, like a purported “team leader” who led at the project level but had no direct reports, or could never be, like a purported “doctor” who didn't graduate medical school. The second example is clear falsity, the first example is only debatable; a team of one, after all, still needs a leader, and for the sole member of the team of one to call himself “leader” for the sake of his resume isn't necessarily out of line.

But whatever method is used to protect the business against those who look for positions to engage in fraud, it must be done. Caterpillar, for example, represents one of the biggest recent cases that illustrates the need. Caterpillar is currently engaged in an internal investigation after finding what it called “multiyear, coordinated accounting misconduct” with one of its recent acquisitions, ERA Mining Machinery's subsidiary Zhengzhou Siwei Mechanical & Electrical Manufacturing. The misconduct in question is said to represent a “non-cash goodwill impairment charge” measured at approximately $580 million. Given that Caterpillar bought ERA originally for $887 million, that's a pretty substantial charge, the kind of charge that might be defended against by weeding out potential practitioners of fraud at the human resources level.

While it isn't easy, and it's never foolproof—and it can never fully take the place of electronic systems designed to protect against malfeasance—human resource's role in protection against insider fraud is clear, present and vital. Businesses have a huge amount of potential employees to choose from, each out to make themselves look best, but separating polish from outright lies is one of human resources’ greatest tasks.